You can solve this with a transfer union, by Germany import more to reduce the foreign primary deficit or by increasing Eurozone inflation to boost nominal growth, while retaining low Euro-denominated interest rates. But you need at least one of those.

Well, that's only a problem if you rely on deficit spending to prop up the budget. Balance the budget by enforcing the tax laws and cut certain spending. Tax evasion is very, very large in Greece If people actually payed the taxes they're supposed to pay, there would be no deficit at all.

Or do you think the taxes would then become so high that they'd strangle growth?

In the long run it seems some kind of structural reform is needed for Greece, to deal with the fact that wages have risen so fast that the

The best way to improve worker productivity in the deficit countries is to invest in productive capital. Hence the best way to resolve the Euro crisis and close the chronic imbalances is recycling of trade surpluses into EU structural funds geared towards productive investment.

As it is, EU industrial policy forces inefficient countries to shut down their physical plant, making them even less productive.

Now, assume that if Greece were like every other European country, it only had 20% tax evasion.

Well, let's look at its tax collection. It's at 140 billion. 5% of that is 7 billion. That's not enough to cut into a 350 billion deficit. We've only accounted for 2% of a 11-15% yearly budget deficit.

Taxes should be reformed in Greece BECAUSE they are unfair to those who pay. But from a macro perspective outside Greece, here are the numbers reported by Eurostat for the last decade:

Greece collects between 40-43% of its GDP annually. The EU collects 44%.

In Greece, 8% of GDP is collected as income tax revenue. 12% social contributions. 5% corporate. 16% VAT and sales tax.

The actual rate of tax collection in Greece is on par with tax collection in Europe. In fact, I would argue that in Greece, tax collection actually exceeds that of most of Europe when you take into account two factors: Shipping and Tourism. Those two industries account for almost 40% of Greek GDP. Tourism is cash heavy, and outside of using credit cards, I'd imagine its an industry with high evasion. Shipping revenues and profits are untaxed precisely because the ships can register in any port, under any flag. The ship owners pay a tonnage tax for the weight of ships only. So here with shipping we account for 20% of the nation's GDP, but for hardly any of the country's taxes. This literally means that when you back out shipping, the GDP subject to tax is smaller, and thus the % of tax to GDP collected is much higher.

To roll back high tax evasion of high taxes would be a very good thing for Greece, but not a solution. After all, high tax evasion of high taxes already yields more revenue than the low tax evasion of low taxes. In the USA, we have hedge fund managers who pay 15% on earnings.

Ah well. I calculated that tax evasion would fall from 25 % to 0 %. Or at least to 5 %, the level in Sweden. That should equal about 8-10 % of GDP and hence bring the deficit under control, if not eliminate it outright. Pie in the sky, I suppose.

The thing is, you have Junker as a titular head of the EU, an ex-head of Luxembourg which has long batted back EU attempts for some transparency into its "tax paradise" arrangements with some of the worst scofflaws in Europe.

I'm not sure about the numbers: this paper shows tax evasion ~15% of GDP for Greece - but that includes effectively non-taxable and not reported as GDP, black market economy revenue and thus a figure larger than the figure the Economist is quoting... I can't believe that any northern EU country has anything similar. I should repeat here (I've mentioned it in a comment before) that the M&F paper shows that personal income tax evasion is disproportionately due to the highest income decile in Greece. At the same time corporate tax rates on profits fell between 2000 and 2010 from 40% to 20% , as mentioned here - and that applies to undistributed profits, distributes profit rates' are at 40%, but the net effective rates were (in 2004 at least that I found data) among the lowest in Europe. In fact Greece overtaxes labor and undertaxes profits compared to EU averages even now.

Total revenues in Greece have been less than 40% GDP (but less than that as I mentioned here) an approximately 5% lower number than the Eurozone average that jibes with the 15 billion Euro evasion the Economist article mentions, and I suppose that Greece is on a par with other EU countries in (legal) tax avoidance?

Shipping offers around 7% GDP (here in Greek) and tourism another 15%... Tourism I wouldn't think has a much higher rate of tax avoidance than other industries. Shipping companies and tycoons are almost religiously tax-exempt, not even the income they make from shipping activities is taxed (this again is in Greek, and accurate AFAICT. It lists more than 55 special provisions in the tax code for shipping companies and their shareholders/owners. Quite shocking)

This is where I was pulling the tax revenue numbers from, but it also breaks down tax collections by type (income, corporate, etc.)

Interesting about shipping, since I read a number of articles recently that put it at 18% of Greek GDP. I wonder, could this be related to the spectacular deviations in shipping costs? During much of the decade until 2008, Greek shippers were charging upwards of $110,000 a day per ship. By 2009, the rates for shipping dropped to $5,000, so low in fact that companies saved money by refusing contracts, drydocking ships, laying off workers, etc. Many of these companies showed income only from scrapping older ships for metal. I wonder where one might find a year-over-year comparison of the shipping industry.

Yes, that's where I got the numbers for the charts I drew too. It's near a 4-5% difference between revenues in Greece and the Eurozone average. The shipping rates recovered in 2010 (but are near crash lows in 2011). Check the Baltic Exchange Index history here:

I am quite skeptical on the numbers circulating on shipping and tourism contribution to Greek GDP. These number are numbers by their respective lobbies so they tend to be inflated (for example, by including a broad area of services to "tourism"). They both use these data to extract tax concessions from the governments. I would be happy to ask shipping and tourism lobbies to give figures not only for their supposed contribution to GDP but also to tax revenues (har, har). Their tax concessions on one hand and subsidies they get on the other one are really outrageous.

With a quick look at the official site of Hellenic Statistics I couldn't find data on Greek GDP composition braking down to shipping or tourism. That's why figures quoted by various sources differ significantly. For example, a recent paper by National Bank of Greece quotes shipping as 6.9% of GDP.

"Eurozone leaders have turned a €50bn Greek solvency problem into a €1,000bn existential crisis for the European Union."
David Miliband

I am quite skeptical on the numbers circulating on shipping and tourism contribution to Greek GDP. These number are numbers by their respective lobbies so they tend to be inflated (for example, by including a broad area of services to "tourism").

"[W]hen you add up the growth prognosis of all companies of a sector strangely the market is often a lot bigger than it should be..."

Shipping is so flush and bust that this alone might explain the different numbers from different sources. Their revenues are not a mystery either since many Greek shippers are public companies. Shipping could be 7% GDP recently, but again, right now business is a bust. It's easy to imagine revenues quadrupling (if not more) in a good economy, and then it becomes a higher % of GDP.

I'd really like to know about the Greek banks and the fact they were started by shipping magnates. What's the relationship between these banks and the shippers who started them. What kind of impact does this have on Greece? It seems to me, should the world economy get going again, the shippers themselves can recapitalize banks in a similar fashion if the old ones collapse, as long as their wealth isn't too closely tied to the banks they created.

Shipping revenue might increase but I don't remember seeing trustworthy figures over 12% GDP, ever. Do not forget all those patriotic Greek shipowners who have their vessels under many flags of opportunity and the number of their hqs in London...

But see this (p.6) and you realize that as far as shipping is concerned Greece is an international tax haven...

I am fairly confident that a not insignificant percentage of higher paid members of staff are family or sons/daughters/etc of serious people / potential allies / partners. They would not be that poorly remunerated, I assume...

Indeed, some of the public companies spread out pay to family members so it doesn't look like the CEO is taking a huge salary. This is the kind of stock that Wall Street loves because there's enough suspicion behind the company officers' motives to draw a lot of short interest. Plus, the fact the company is run by Greeks also attracts short interest. Then the mo-mo guys jump on board, pump the story when revenues in oil drilling and shipping come in, and they squeeze the shorts blind.

Well, that's only a problem if you rely on deficit spending to prop up the budget.

No, you can't solve a foreign balance problem by curtailing the sovereign budget. That just shifts the foreign debt to private hands (all too often temporarily, as we have seen recently). You have to make foreigners buy more of your stuff, or buy less foreign stuff.

That means industrial policy, which costs money. Money that the ECB should be printing on demand. But which it is not because it is run by deficit errorists.

In the long run it seems some kind of structural reform is needed for Greece, to deal with the fact that wages have risen so fast that the productivity improvements of the export industry (including tourism, I suppose) hasn't managed to keep up, lowering the relative strength of Greek companies.

Again, that's not primarily a Greek issue. It's a matter of inadequate German wages causing a demand shortfall in the Eurozone, and that demand shortfall hitting those countries which did not engage in irresponsible wage suppression policies.

And this is quite clearly, up to Greek consumers and companies. Buy less foreign stuff, make better stuff at a lower cost.

Of course, Greek private debt is pretty low comparatively. It's the government that overspent. So it's not really a matter of buying too much foreign stuff as much as it is too much foreign fuel, or foreign military weaponry, etc. The BMWs flying around Athens are reserved for the privileged.

If Germany generates inadequate domestic demand with irresponsible wage suppression, someone, somewhere is going to have either unemployment or bubbles. Passing that problem around like a grenade with the pin pulled out does not strike me as the pinnacle of responsible behaviour.

And why, precisely, should countries outside the Eurozone - who are actually able to defend themselves against mercantilist attacks - voluntarily decide to subsidise our irresponsible policies?

For that matter, given that German has demonstrated no inclination to permit a currency or industrial policy that would aid Greece, how precisely do you propose that they improve exports? None of the traditional neo-mercantilist policy options are available here.

Other countries currently seem entirely happy with doing nothing about "mercantilist attacks", as it means they can import lots of nice stuff.

When it comes to improving exports, I, or any political guy, is the wrong person to ask. Especially in the short-run, as government-led structural reforms like or industrial policy like improving infrastructure or having a non-insane energy policy takes years or decades to implement. No, you're better off asking those who actually run successful export companies what Greek companies are doing wrong when they fail to export outside the eurozone.

Greece's products are too expensive because property and worker's pay inflated with cheap currency, bringing it on par with the Eurozone's. Thus, what maunfacturing plants were there eventually shuttered, and it never had the ability to compete with high value technological production. Isn't that the difference?

All economics might be politics, but all business certainly isn't. When you ask politicians or pundits to run manufacturing companies, things usually go down the drain. Fast.

According to a recent WEF survey, Greece has the lowest competitivness of all EU nations. Greece has slipped from place 50 to place 109 on the World Banks list of the best places to run a business, below countries like Bangladesh or Ethiopia. Big stumbling blocks are things like inefficient government bureaucracy and massive corruption. During 2004-2009, employment in the public sector increased by 100.000 people, largely as a reward for political loyalty. At the same time, public salaries rose by 60 %. How this could not result is a fiscal disaster, is hard to understand. It's just not possible to keep spending more than you tax, year after year, and especially not when you're in the good part of the business cycle!

During 2004-2009, employment in the public sector increased by 100.000 people

No. The number is supposedly +58.000 (16.000 of those were in 2008 for obvious reasons, 12.000 in 2004 - an Olympic year...). In early 2010 a detailed census of public sector employees found them to be ~768.000 - that's about 15% of the work force, not a high number by OECD or EU standards.
Public salaries rising by 60% in 4 years is a joke. Just to give you an idea: over the same period public sector wages as a percentage of GDP were pretty much steady despite the rise in public employee numbers.

So the public sector's extent was not the cause of the "fiscal disaster". Lagging revenue was. And the decile where the lagging was humongous was the top decile...

An aside:

I'm thinking of posting a diary with a title like "10 fairy tales about the Greek economy" debunking the poppycock that "serious" news sites (not to mention economists) are propagating regarding the data before the crisis... is that the sort of thing we all have in mind that ET reports are about?

I'm thinking of posting a diary with a title like "10 fairy tales about the Greek economy" debunking the poppycock that "serious" news sites (not to mention economists) are propagating regarding the data before the crisis.

That would be very useful. I can only 'dip' into the discussion/analysis intermittently so anything helping to separate Reality from the Intellectual Sludge hiding Reality would be welcome.

...is that the sort of thing we all have in mind that ET reports are about?

From my perspective: Yes.

She believed in nothing; only her skepticism kept her from being an atheist. -- Jean-Paul Sartre

Greek unit labour costs have risen by 50 per cent since 2001. This compares with a eurozone average of about 25-30 per cent and a German cost increase of little more than 6 per cent. Even Portugal has a much lower increase than Greece of some 36 per cent.

Not dishonest, as in the next sentence it's mentioned that German salaries need to increase. And as far as I know, there has been no evidence of any unusually large asset stripping in Greece in the decade leading up to the Greek crisis.

50% is outlandish even for nominal compensation. I would like to see that sourced. I'm having second thoughts about Jones' numbers, but certainly noone has claimed 50% increase in even nominal ulc netween 2001 and 2009

If the surplus is handed to the workers then they typically consume it and consume cheap goods and services (like taking vacations), which will tend to be imported and thus eradicate the surplus.

If the surplus is handled by industrialists it will be invested, thus turning to wages, then imports.

If the surplus is going to remain as surplus it needs to be kept as foreign assets, thus handled by financial gamblers. And what assets are more profitable in the short run for the financial gambler then dodgy assets?

Recycling the surplus would mean, among other things, investing in the likes of Brodosplit in order to make their quality product price-competitive, not shutting them down because they can only price their outstanding product at a saleable price with the help of public subsidies. In other words, in order to compete with China you don't make high-end producers in low-capital-plant EU member states go out of business. You improve their capital plant.

The EU is currently unable to do this kind of thing, and the only surplus recycling allowed by market worship is the purchase of dodgy bonds. In fact, in investing in capital plant in chronically underinvested countries the EU would be introducing competition into the niche of historically well invested countries producing high-end goods.

Varoufakis' idea (part 3 of his modest proposal) is to have the European Investment Bank do it funded by contributions from the surplus countries to an EU-level budget.

Given the track record of the ECB, the European Commission and other assorted EU bureaucracies, would you entrust them with a massive project to evaluate which companies would receive injections of huge amounts of taxpayer money?

And we're also seeing what happens when private institutions - banks and credit rating companies - are entrusted to oversee massive projects with injections of huge amounts of private money. Hypothesizing corporations are necessarily better at long term planning and resource allocation than governments is as fallacious as to think governments are necessarily better at it than corporations.

She believed in nothing; only her skepticism kept her from being an atheist. -- Jean-Paul Sartre

We have seen that in the current regulatory climate many banks and real estate developers and so on, the so called FIRE sector, has failed in many places. Not everywhere, but in many places.

However, this does not mean that eurocrats or politicians would manage FIRE better, nor that non-FIRE enterprises which in general seem well managed, need any more political meddling what so ever. It means the FIRE sector requires better regulation.

The Greek government has failed utterly in reining in its deficit through tax raises and spending cuts: indeed, when the Karamanlins government took power in 2004 and saw that the country was at the edge of a cliff, it pushed as hard as it could on the accelerator, increasing spending massively, including a 60 % (!!!) salary raise for public servants. This utter failure of democratic government does not mean it should be abolished and replaced by rule of corporations. Politicians should be careful not to try running businesses, and businessmen should be very careful not to try running countries. If they do, you get the USSR and USA respectively.

The Greek government has failed utterly in reining in its deficit through tax raises and spending cuts

Unless you have a plausible story about how removing the Greek sovereign deficit would have repaired the foreign balance, it would have been pissing into the wind. The debt load would have increased just the same, and judging by Greece's Mediterranean neighbours it would have increased by means of a speculative real estate bubble.

That is, unless you can make the case that the Greek sovereign (a) had a larger import quota than the Greek private sector or (b) spent the money in ways that materially degraded Greece's ability to obtain hard currency, eliminating the sovereign deficit would not have prevented the crisis. It might have brought it forward, by inducing a business depression due to demand shortfall, or it might have made it bigger by inducing a private sector bubble. But wage suppression always eventually comes back around to bite someone in the ass with a demand-side depression, and the wage suppression was going on outside Greek jurisdiction, so it's a little hard to blame them for that.

Imports would also had to be cut, and the competitivness of export companies increased, as we have discussed in other places. A great idea is to avoid massive wage inflation that is completely disconnected to productivity increases... Furthermore, nothing requires that foreign balance deficits must be balanced through the issuance of debt, private or public. It can just as well be financed by foreign entities aquiring equity in domestic companies.

Speculative real estate bubbles can be reined in with regulation, if you lack the ability to raise rates (not that I'm going to focus much on this, as it wouldn't surprise me if we'll find that Sweden has failed at this very thing).

And yes, I place a very large part of the blame on "responible" German labour unions for accepting the wage suppression.

Imports would also had to be cut, and the competitivness of export companies increased, as we have discussed in other places.

Well, yes.

But it is not immediately obvious how this has any simple, mechanical relation to the sovereign balance.

A great idea is to avoid massive wage inflation that is completely disconnected to productivity increases...

Has this actually happened? Do we have time series for Greek wages and productivity around here somewhere, or are we talking out of our posteriors here?

Furthermore, nothing requires that foreign balance deficits must be balanced through the issuance of debt, private or public. It can just as well be financed by foreign entities aquiring equity in domestic companies.

Ah, the foreign direct investment pony. I was wondering when that one would show up.

Thing is, when all traditional avenues of (neo-)mercantilist policy have been choked off, Greece is left with precious few policy options to encourage FDI. And most of them are bad for both the Union and, in the medium term, for Greece.

Speculative real estate bubbles can be reined in with regulation,

Yes.

But, again, it is not immediately apparent how this will repair the foreign balance.

Certainly, you can repair the foreign balance by gutting demand so far that your economy stops importing food and fuel. Please refer to Suharto's Indonesia for the results of that and get back to me if you still think that's a good idea.

This is the usual brain rot excuse - what if wages outstrip productivity?

Well - what if they do? Profits and dividends can always be cut to keep prices level. It's not as if leaving profits and dividends to accumulate is actually going to drive investment.

But apparently this realisation is unpossible. Spending on wages must always be cut first, and must be cut more and more severely, until - er - only millionaires have anything left to spend.

At this point austerity can be applied, the state can be bought, and the cycle can repeat elsewhere.

It's specious nonsense. We know that wages and productivity have been disconnected since the 70s - which is, incidentally, when this idea first became something that "everyone knows" i.e. that paying people too much was the primary cause of the inflationary shocks that were actually caused by energy price increases and by Nixon's default on US obligations.

And for the proponents - in what sense is what's happening to Greece now significantly better economically than what happened to Weimar Germany?

in what sense is what's happening to Greece now significantly better economically than what happened to Weimar Germany?

It's not, of course.

During the middle years of the Weimar Republic Germany experienced a burst of "prosperity" based on capital inflows (debt accumulation.) This inflow was used for current account purposes instead of being deployed as long term capital to increase productive capacity -- & is this beginning to sound familiar?

:-)

It's the same old story: the inability to cognize the fundamental difference between "wealth" and "accumulating stuff."

She believed in nothing; only her skepticism kept her from being an atheist. -- Jean-Paul Sartre

A great idea is to avoid massive wage inflation that is completely disconnected to productivity increases...

No, this has not actually happened... I've quoted Erik Jones many times, here's one more:

Let's start with some data - all of which is taken from the Annual Macroeconomic Database of the European Commission and is freely available on-line. The most damning data against Greece is the movement in real compensation per employee. If we set the year 2000 equal to 100, then by 2009 Greece was at 122 while Germany was at 102. This would suggest that Greek real wages have risen by 20 percent more than Germany - and they have - but that tells us very little about competitiveness.

What matters in terms of a head-to-head competition is how Greece and Germany compare in the cost of labor per unit of output and not the real compensation of employees. Moreover, we should look at their performance across the European marketplace as a whole. By that measure, if we set the year 2000 equal to 100, then by 2009 Greece was at 98 while Germany was at 95. Germany is still doing better than Greece, but only by a little and both have improved against the rest of Europe.

In fact Greek (inflation adjusted) wages lagged behind productivity increases all through this whole bubble period. And mind that the wages themselves were increasingly unequal... Inflation in Greece was profit driven.

The ships are of excellent quality, just like the oil tankers we used to build in Sweden were. But you know what? They couldn't compete. They were too expensive. So we had to close the shipyards, as we didn't feel like dumping unlimited amounts of taxpayer money into loss-making companies for ever and ever.

We could still build excellent ships in Sweden. But no one would buy them for the prices we would require to cover our costs. That's just the way of the world.

However, this does not mean that eurocrats or politicians would manage FIRE better, nor that non-FIRE enterprises which in general seem well managed, need any more political meddling what so ever. It means the FIRE sector requires better regulation.

In my experience working for US, British, German, and Swiss companies there's as much Own Goal "political meddling" within and between companies as there is from the government. Brass tacks: whether the entity is Public or Private it is run by people and people "do" politics. An 'Empire Builder,' whether in government or IBM WILL attempt to build an Empire; a person motivated by the Common Good will work towards that.

She believed in nothing; only her skepticism kept her from being an atheist. -- Jean-Paul Sartre

would you entrust them with a massive project to evaluate which companies would receive injections of huge amounts of taxpayer money?

NO! That is the problem with capture of "public" institutions by private interests. This is the case for The Fed in the USA and the ECB in Europe. But your line of argumentation is how we got to this point and not a way out of the dilemma. We have had forty years of unchallenged propaganda advocating "deregulation" and painting "government as the problem". Enough people have bought into this that it has become true.

It wasn't always thus. There was a time when there was a concept and an expectation of government working in the public interest. As De Gondi recently reminded us, Artistotle defines tyranny as a government run for private, not public, interests. Forty years of right wing propaganda from libertarian billionaires has sold the publics in the "developed" world on the virtues of tyranny! So now we need for the duped to wake up and to insist on a housecleaning.

Given the track record of "finance, the brain of the economy" in the allocation of capital and the determination of the direction and pace of investment and the rate of money creation... don't you think the economy needs a brain transplant?

I think a brain implant would be more appropriate. "Finance as the brain" always seems to have its rational, judgemental and predictive functions sidelined by orgiastic biochemicals released by ongoing and never ending greed.

Again, that's not primarily a Greek issue. It's a matter of inadequate German wages causing a demand shortfall in the Eurozone, and that demand shortfall hitting those countries which did not engage in irresponsible wage suppression policies.

- Jake

And yet, only yesterday, during his so-called news conference, french president Sarkozy was seen and heard making a complimentary object-lesson out of this very policy of the Germans' wage suppression(s).

And he gets away with this!

Look, I know our abilities to take some useful action to help are very limited here but couldn't EuroTrib at the very least do something in an organised way to vocifierously oppose the juggernaut of eco-nonsense that's still being piously peddled in the popular press, radio and television?

France Info, France-Inter, and others, for example, continue to report off-handedly that the austerity measures --called bail-outs, etc.--are aimed at "rescuing Greece" rather than what they obviously are: a rescue of the financial interests which made lousy and corrupted investment decisions.

Imagine the impact of hearing a news report describe Germany's wage suppression policies as being and having been "irresponsible"!

I was struck by that; others would be as well. The flim-flamming is still going on flagrantly and with little apparent "blow-back" or negative consequences for those who are brazenly peddling theoretic bull-shit. Why, now, is this still allowed to go on?

"In such an environment it is not surprising that the ills of technology should seem curable only through the application of more technology..." John W Aldridge